Shadow Economy Threatens the Future of Belarus

Last month the Deputy Ministry of Labour and Social Protection of Belarus confirmed that the government wants to introduce a new tax on unemployed people.

The state wants to get money from economically active people without official jobs who benefit from free or subsidised services...

Last month the Deputy Ministry of Labour and Social Protection of Belarus confirmed that the government wants to introduce a new tax on unemployed people.

The state wants to get money from economically active people without official jobs who benefit from free or subsidised services from the state such as hospitals, schools and kindergartens. The Belarusian officials started to think seriously what to do with the vast shadow economy of the country.

Although some label the Belarusian regime as totalitarian, in reality its control is far from absolute, particularly when it comes to the economy. As the Warsaw-based Solidarity with Belarus Information Office recently noticed, 10 to 25 per cent of the Belarusian economically active population engage in doing illegal business.

For example, according to the Ministry of Trade every second car repair facility works illegally and many in Belarus rent flats without a formal contract. The government effectively tolerates, or rather has to tolerate illegal activities. This reality undermines legal businesses, worsens the business climate and fosters legal nihilism.

Tobacco, Fuel and AlcoholFor the EU

The most publicised example of illegal business is smuggling. Many Belarusians living in western regions engage in cross border illegal trading. They smuggle fuel, cigarettes and alcohol into EU member countries, mostly into Poland and Lithuania and, to a lesser extent, into Latvia. Smugglers operate also on the Belarusian-Ukrainian border in the South.

A survey conducted this year by a reputable global information and measurement company Nielsen demonstrated that three quartersof the cigarettes smuggled into Lithuania came there from Belarus. As a result of efforts of smugglers, the scale of cigarette smuggling into Lithuania is Europe’s second-largest. Up to 30 per cent of all cigarettes sold in Lithuania have not been legally imported according to Laurynas Bucalis of Philip Morris Baltic who gave an interview to the BNS news agency.

This illegal trade has existed since early 1990s, and first emerged along the Polish border after the Soviet government loosened their border control. The scale grew, the types of smuggled goods changed, and it is no wonder that now in the Hrodna Region about eighty thousand able body residents officially have no work and are neither students nor pensioners.

Shadow Economy Not a Problem for the Government

Most of those who work illegally work in the service sector. The most significant spheres include car repairs, flat and house repairs, organisation of festivities and events, photographic and video services and private tutorials to prepare for exams. In the first half of this year, in the south-eastern Homiel Region, the government’s tax agencies prosecuted 207 individuals who leased their flats, houses or parking lots illegally; over the same period of time the Homiel police caught 69 illegal taxis.

Even those who officially register as so-called “individual entrepreneurs” tend to hide some of their revenues to pay less in taxes. According to official information, the state tax agencies find violations of the tax legislation in 99.8 per cent of the cases they audited in the first half of this year.

The government downplays the issue. In August, the minister for taxes and customs Uladzimir Paluyan said, “We shall not say that it is too large a sum for our country.” He estimated the share of shadow economy in Belarus at $5-6b, i.e., 8-10 per cent of GDP, while emphasising that this sum includes also such revenues like vegetables grown by citizens in their own personal plots and the selling of private property. In 2009-2010, the same ministry estimated the share of the shadow economy to be even higher – at 10-15 per cent of the GDP.

Belarusian Government’s Social Contract With Business

At first glance, it appears that the government is losing a lot of its tax revenues. A year ago, after the Trade Ministry lamented the scale of illegal repair workshops’ business in the country, Deputy Prime Minister Anatol Tozik proposed to introduce the obligatory declarations of income for every citizen. “Specialists say that we have too high a percentage of a shadow GDP. And official statistic data absolutely do not correspond with those realities which we see ourselves. How many cars do we have per capita? Why is it impossible to get a table in [overcrowded] Minsk restaurants?”

Yet these losses apparently do not concern the government as nothing has changed since then. The government regularly conducts inspections but does not go after the roots of these phenomena. The shadow economy helps the Belarusian leadership to relieve economic hardship while wild underground business destroys legal business by proposing lower prices that work well outside of the law.

Nevertheless, the government apparently understands that it is better off leaving illegal businesses alone. Precarious businesses hold illegal businessmen and workers in check as they realise the instability of their own situation. Illegal entrepreneurs and their employees do not actively engage in oppositional activities, at least no existing evidence suggests that they provide funding to the opposition.

This social contract – a tolerance of illegal business in exchange for not engaging in active politics – works not only for common people but also for state officials. Numerous public servants in the eastern regions of Belarus have their own business enterprises in neighbouring regions of Russia. Usually they work in retail or own cafes or restaurants.

Tip of the Iceberg?

The shadow economy in Belarus encompasses not only some shrewd individuals. Presidential edict 510 prohibited audits by tax agencies of new firms in the first two years from the date of their establishment. It created a loop hole for fraud as fake firms appear, operate and close down before tax agencies can check their work.

The Customs Union with Russia has led to new massive illegal capital transfers from Russia through Belarus. They apparently remain under the radar of Belarusian governmental agencies. Meanwhile, a major Russian journal Expert deemed it “Trading with Emptiness,” and explained last month, “Conditions for illegal capital transfers from Russia through “gray” [opaque – ed. BD] mechanisms inside the Customs Union seems to be very suitable. Measures taken by the Russian Central Bank against them are arguably useless.”

According to the Russian Central Bank, fictitious imports from members of the Customs Union made up a bulk of capital runoff in last year as $15b have been transferred out of Russia to offshore accounts by using “doubtful” contracts with Belarusian exporters alone. Inside the Customs Union no customs control exist and a mere goods consignment note suffices.

In fact the Belarusian government is far from omnipotent and state control in Belarus has certain limits. The regime tries to convince people who are doing illegal business that the state agencies are aware but will tolerate unrestrained entrepreneurship, provided that illegal businessmen behave properly towards the regime.

This is a very loose form of control which allows economic freedom and even huge profits without any connection to the state – be it official registration or the payment of taxes. Lukashenka may lash out at these rather dubious kinds of businesses and called people engaged in them “lousy fleas,” but business goes on. While it does not threaten the regime, it damages the future of Belarus as a country based on the rule of law.

State TV widely reported on a meeting with AlexandrLukashenka where he discussed the recent potash-related affair, but also its consequences for Belarus-Russia relations: a civilised divorce or a further co-operation with new management at Uralkali.

Channel BT1 also covered preparations for the World Cup in Hockey. The reportage showed that the successful organisation of the event remained a top priority for Lukashenka. Ukrainian representatives met with Belarusian deputies to discuss intensifying mutual relations. Serbian businessmen seek to increase co-operation with Minsk.

Journalists emphasised that in fact Russia had lost much more in the affair than Belarus. It should not impede the relations of both states. They pointed out that Lukashenka principle position as being no one could disrespect the Belarusian nation: “They say: what did Lukashenka want to demonstrate? I will give you an answer: Lukashenka wanted to demonstrate one thing: it will not be allowed to wipe one’s shoes on us. We are a sovereign state. We have never made trouble for our neighbours, our brothers the Russians”. It continued on to state that the Belarusian nation has chosen the Belarusian president and thus his actions and decisions aimed at one thing — the protection of Belarus’ national interests.

The state TV noted that the head of the state was actually protecting the interests of both countries, Belarus and allied Russia. It emphasised that development of relations with its historical ally and strategic partner, Russia, still remained important for Belarus.

Lukashenka also expressed his views on how both the Belarusian and Russian sides should work together to resolve this “dark story”. Either a civilised divorce or continuation of co-operation with a new management of Uralkali is possible. Belarus should also receive some compensation for its losses, as “all what was stolen from us, should be returned”, the head of the state added.

Tax free shopping to attract more tourists. State TV journalists reported that Belarus was the first among CIS countries that would introduce tax free shopping for foreign customers. Journalists pointed out that “50 countries worldwide, including our closest neighbours: Poland, Lithuania and Latvia, have already set up conditions for a comfortable shopping.”

A tax free system should attract more foreigners to come to Belarus. According to journalists, the case of Sweden, which introduced it already in the 80s, proved that. Today 80 per cent of tourist perceives tax free as a serious incentive to purchase and for visiting certain countries. “If the car costs a few thousand dollars, the desire to purchase something tax free is obvious, and the economy will feel it”, journalists explained.

Serbian businesses interested in investing in Minsk. State television noted that many countries knew about the geopolitical advantages of Belarus. European countries have already for some time considered Minsk as a reliable shield from many dangerous phenomena, including extremism.

Officials and entrepreneurs from Serbia started talks in Minsk on the intensification of business co-operation. State TV journalists pointed out that over 3 years, both countries had increased the trade turnover 3 times, now standing at $150m. In regard to trade turnover with Serbia, Belarus has always maintained a positive balance. In 2011, Belarusian exports were estimated to be nearly $60m.

State further mentioned that in 2012, both sides traded for $150m. However, it was still less than what was demanded by Lukashenka — $500m annually in trade in the near future. The journalist commented that conditions for such a development in trade exchange remained even more promising, because Belarus has maintained with Belgrade a free trade regime. Belgrade and Minsk signed a package of documents of further co-operation.

Domestic Politics

Minsk and Kiev: a need to develop mutual relations. Belarusian television reported on a meeting of the inter-parliamentary commissions of both countries which recently took place in Minsk. Journalists commented that both sides aimed at making progress in their mutual relations in various spheres, from political to humanitarian co-operation. Thus, the national parliaments of Belarus and Ukraine would intensify their joint projects in the near future.

World Cup in Hockey is coming. The state channel noted that 227 days remain until the event starts in Minsk. Thus, a special press conference gathered journalists and experts from Belarus and Russia.

The head of the state is supervising the ongoing preparations for this sporting event. In the words of Lukashenka, this event might be a chance to change the international image of Belarus. “We should prepare our infrastructure, to be not worse than in the other countries. It should be done so that people who would come, could say: ‘Yes, it is completely different country than we thought! And so other people would desire to come here”, he said.

Journalists noted that nearly 20 thousand people could come to Belarus to attend the sporting event.

Foreign Affairs

CSTO: a more ambitious mission. The head of the state attended the Collective Security Treaty Organisation session in Sochi. Belarusian state channel emphasised that the members of CSTO stepped up regional security by making a decision on unprecedented aid for the protection the Tajikistan border with Afghanistan.

Lukashenka talked how the importance of the development of these and other joint initiatives, mainly because the problems facing everyone have become transnational these days. The head of the state commented upon the situation in Syria and expressed his support for Russia in regard to settlement of the conflict.

Apart from the assembly, Lukashenka also met with the Armenian president, Serzh Sargsyan and talked about bilateral relations.The Belarusian ruler confirmed that Minsk would support the Armenian intentions to join the Customs Union.

Society

“Belaya Rus” wants to talk to people. The state TV journalists reported that the head of the most respectable civil society organisation in Belarus, “Belaya Rus” (White Russia), met with representatives of the local branch of the organisation.

The state channel pointed out that over 6 years of its existence it became the main organisation in its sphere in the country. Today over 140 thousand of people belong to it. One third of the members are young people, the journalists specified.

Aleksandr Radzkou, the leader of White Russia, explained on TV the importance of informal ways of talking to people, in particular in the countryside. The organisation would like to spread this type of social dialogue also to enterprise.

Belarus Digest prepared this overview on the basis of materials available on the web site of Belarusian State Television 1 (BT1). Freedom of the press in Belarus remains restricted and state media convey primarily the point of view of the Belarusian authorities. This review attempts to give the English-speaking audience a better understanding of how Belarusian state media shape public opinion in the country.